Sterling rose around 1% this afternoon and British government bond yields posted their biggest one-day rise in over a month on signs the UK and EU are finally on the brink of clinching a deal to govern trade ties after the end of this year.

A deal is imminent and could be agreed as early as this evening, a senior EU diplomat told Reuters. 

Earlier, European Union member states started to prepare procedures to put in place a new trade deal with the United Kingdom from January 1st, sources in the bloc said, indicating a deal was imminent.

"The market is anticipating that a deal will be agreed in the next day or two," said MUG strategist Lee Hardman, adding sterling could strengthen to $1.36/$1.37.

He said, however, traders would be keen to see details of any agreement, given the expectations is that the initial deal will be a bare bones one with specifics to be thrashed out in 2021.

"The best case scenario for the pound would be if we also see details released form the EU and UK side of things alongside the deal to try and reduce the initial disruption when we shift to a new trading arrangement."

The pound, which had earlier snapped a three-day losing streak on the lifting of a French border blockage, extended gains after the report.

Against the euro, the pound jumped 1% to 90.15 pence.

The UK bond yield curve was headed for its biggest rise since early November.

A pan-European equity index hit a session high, up nearly 1%, and Britain's midcap equity index was 1.4% higher on the day.

Momentum has built in recent days for an agreement, with UK Prime Minister Boris Johnson offering a compromise on the sticking point of fisheries, though that was rejected by the EU.

Failure to reach agreement by December 31st will disrupt commerce worth $1 trillion a year while casting Britain adrift without any arrangements in place with its biggest trading partner.